How Local Firms Form Alliances with High-social-status Foreigners

Abstract

This study examines the factors that influence local firms’ forming alliances with foreign firms. We first argue for the social-status homophily effect, that is, a centrally-positioned local firm is likely to ally with foreign partners also at a central position. Moreover, the path-dependence effect of prior ties makes the firms without a central position find it even harder to partner with centrally-positioned foreigners. To compensate for a low network centrality, local firms must develop general industry experience or successful performance track records. Our analysis of data on venture capital (VC) industry in China, with a focus on U.S. partners, supports our hypotheses. Uniquely, we find that the framework applies to the U.S. partners’ network centrality not only in China but also in the U.S. VC market, although both homophily and path-dependence effects are insignificant when the U.S. partners’ network centrality is examined in the U.S. market. The findings offer fresh implications to local firms t...